The tax law allows the majority of taxpayers who sell their homes to enjoy 100% tax-free profit from the sale.
If you have owned and used your home as your principal residence for at least two of the five years preceding the sale, you may exclude from income tax up to $250,000 of profit if you’re single or up to $500,000 if you’re married filing jointly. Generally, the exclusion may be used only once every two years.
The law provides that married individuals may exclude up to $500,000 of profits if:
The law does contain some relief for those taxpayers who cannot meet the ownership and use rules or who have already excluded gain on a home sale within the two-year limit. If the failure to meet either rule is due to a job change, health problems, or certain other unforeseen circumstances, a partial exclusion may be available. The partial exclusion is calculated based on the fraction of the two years that the requirements were met.
The exclusion rules are good news for most taxpayers. Not only will most home sales not be subject to tax whether there is a replacement home purchased or not, the need for recordkeeping may be lessened for many taxpayers. However, homeowners with very large profits locked in their homes could face a tax.
Because home prices can appreciate significantly over a period of years, taxpayers cannot be certain that their gain in a future home sale will always be at, or under, the exclusion limit. For this reason, it is advisable to maintain good records of home costs and improvements in order to verify the basis of the home when it is sold. Good records will also be necessary if an audit requires you to document your basis in a home sale.
If you’d like more information or assistance with tax matters related to buying or selling a home, contact our office. We’re here to help.
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